Undervalued Renminbi Is The Greatest Threat To Economic Recovery

Economics / China Currency Yuan Jan 26, 2010 - 04:49 PM GMT

Sir, Michael Spence is dead wrong in arguing that “the west is wrong to obsess about the renminbi” (January 22). An undervalued renminbi represents the single greatest threat to global economic recovery and a dangerous inflationary trigger within China.

The undervalued renminbi has helped to overheat the Chinese economy by attracting far more foreign direct investment into China than would otherwise exist – too much of a good thing. Currency speculators are also flooding into China in anticipation of an inevitable appreciation of the renminbi; this hot money is further fuelling the stock market and real estate bubbles. A floating renminbi would solve both of these problems.

Globally, because the renminbi is pegged to the dollar and the dollar has fallen significantly since March 2009, Europe as well as other countries around the world – from Brazil, Peru and Colombia to Japan, South Korea and Thailand – have lost competitive advantage to both the US and China. This has stalled recovery in many of these countries.

Prof Spence is right that the ultimate solution is a strong Chinese consumer. However, he wrongly portrays China as having a “high savings rate”. Much of China’s alleged “savings” is simply an artefact of China’s currency manipulation process that requires sterilisation of dollars and their re-export to America. This is Stalinist forced savings, not virtuous thrift.

Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

© 2010 Copyright Peter Navarro - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Comments

Zhuubaajie
26 Jan 10, 18:44

Thief Yelling Stop Thief

How can the RMB be anything that approaches a threat to anybody? It is NOT EVEN USED IN TRADE other than with the few nations that have swap agreements with China (you can count them in one hand), and even those are limited in amount. So Dr. N's own nation printing TRILLIONS (each with 12 zeros) out of fiat thin air does not have detrimental effects on the world, and it is only Chicoms refusing to float their own currency (in order to prevent highway robbery by economic hitmen) that can do damage.

Len
27 Jan 10, 22:17

China currency

We have to remind ourselves Why China is keeping its currency undervalued-job creation.

China’s goal is to have the largest number of its people working, this involves manufacturing and export. The Chinese government is far more interested in keeping its citizens working, not increasing the value of its currency.

The idea that has been mentioned is that the US is exporting its inflation to China. The US consumer buys cheap goods from Chinese factories, the Chinese take the US Dollars received in payment and use them to buy US Treasury Securities, the cost of living in the US appears as low inflation via cheap goods from Chinese exports And US Treasuries are bought to finance the US.

Now China is saying ‘no mas’ to any more US Treasuries(with the exception of the shortest term Treasuries and TIPS) and has decided to invest the US Dollars it does have in commodities, other currencies or government bonds issued by other nations.

Anyone remember the weekly trips the last US Secretary of the Treasury, Hank Paulson, made TO China?

The goals of those meetings was to keep China buying US Debt, NOT to strengthen the Renminbi.

Chinese exports to non US markets (Europe & South America), in dollar value and quantity amounts, surpass the exports to the US. In other words, the Chinese don’t need the US as much as before but the US needs China more than ever to buy its debt.

The time for action to force the Renminbi to float was back in 2001 When China joined the WTO, now it is far too late.

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